FRM Part II · FRM Exam Part II · Correlation Basics: Definitions, Applications, and Terminology
Two assets have 5 paired observations. Among the 10 possible pairs of observations, 8 are concordant and 2 are discordant, with no ties. What is Kendall's tau?
Kendall's tau is 0.60. It equals concordant pairs minus discordant pairs divided by total pairs: (8 minus 2) divided by 10. The figure 0.80 would wrongly count only the concordant share without penalising the discordant pairs.
- A0.80
- B0.60Correct
- C0.20
- D0.40
Explanation
Kendall's tau = (concordant - discordant) / total pairs = (8 - 2) / 10 = 0.60. Using 8/10 = 0.80 ignores the subtraction of discordant pairs. Using 2/10 = 0.20 reports only the discordant share.
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